Omega Healthcare Investors, Inc. (OHI) CEO Taylor Pickett on Q2 2018 Results - Earnings Call Transcript

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About: Omega Healthcare Investors, Inc (OHI)
by: SA Transcripts

Omega Healthcare Investors, Inc. (NYSE:OHI) Q2 2018 Earnings Conference Call August 6, 2018 10:00 AM ET

Executives

Michele Reber - Investor Relations

Taylor Pickett - Chief Executive Officer

Robert Stephenson - Chief Financial Officer

Daniel Booth - Chief Operating Officer

Steven Insoft - Chief Corporate Development Officer

Analysts

Jonathan Hughes - Raymond James

Juan Sanabria - Bank of America

Chad Vanacore - Stifel

Daniel Bernstein - Capital One

Lukas Hartwich - Green Street Advisors

Todd Stender - Wells Fargo

Tayo Okusanya - Jefferies

Operator

Good morning. And welcome to the Omega Healthcare Investors Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Michele Reber. Please go ahead.

Michele Reber

Good morning. With me today are Omega’s CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth and Chief Corporate Development Officer, Steven Insoft. Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook, generally. These forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially.

Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures, such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under Generally Accepted Accounting Principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the Financial Information section of our website at www.omegahealthcare.com, and in the case of FFO and adjusted FFO, in our press release issued on Friday.

I will now turn the call over to Taylor.

Taylor Pickett

Thanks, Michele. Good morning and thank you for joining our second quarter 2018 earnings conference call. Today, I will discuss our strategic asset repositioning and portfolio restructuring, our dividend outlook and guidance for the remainder of 2018 and updates on Medicare and Medicaid reimbursement. We have made considerable progress in strategic asset repositioning and portfolio restructurings. In the first two quarters of 2018, we disposed the 64 facilities for total consideration of $311 million.

The revenue reduction related to these sales was $34 million, while the trailing 12-month cash flow on these assets was $25 million. The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds, which equate to a cash flow yield of 8%. We believe we’re going to be able to redeploy these proceeds into higher quality assets with good right coverage, while experiencing minimal revenue impacts.

Our strong sales results today reflect the continued appetite for SNF assets by local market private buyers. We will likely to sell 15 to 20 additional facilities, but the bulk of our asset sales are now complete, excluding the ultimate outcome of the Orianna portfolio, not already slated for transition. Orianna is now the only material portfolio that is being restructured. On July 1st, 13 Mississippi facilities with annual contractual rent of $12 million were transitioned to an existing Omega operator.

On August 1st, one Indiana facility of annual contractual rent of $450,000 was transitioned to an existing Omega operator. In the next few months were scheduled to transition nine facilities in North Carolina, Virginia, Georgia, and Tennessee. The combined new annual contractual rent of $4.3 million comes from three existing Omega operators and is in line with our expectations and previous disclosures.

The Orianna restructuring support agreement relating to the remaining 19 Orianna facilities was terminated on July 25th. Omega, the unsecured creditors and debtors have all filed various motions with respect to the next steps in bankruptcy. We have had conversations with various potential new operators and continue to feel comfortable with our previously estimated Orianna portfolio rent or rent equivalent range of $32 million to $38 million. Given that Orianna is an ongoing legal matter, we will not be committing further or answer questions about these proceedings on this call.

Turning to our dividend outlook and guidance for remainder of 2018. Our second quarter dividend of $0.66 per share reflects a payout ratio of 87% of adjusted FFO and 98% of funds available for distribution. While these ratios are high from an historical perspective, we feel comfortable with the payout ratio given that we incurred at normally high second quarter Orianna legal fees of $2 million. In the fact, we projected Orianna asset rent or rent equivalent of $8 million to $9.5 million per quarter. After normalizing the effect of Orianna, the pro forma dividend payout ratios have down to approximately 81% of adjusted FFO and 91% of FAD. We’ve tightened our adjusted FFO guidance to a range of $3.03 to $3.06 per share, and our FAD guidance to a range of $2.67 to $2.74 per share.

Our tighten guidance reflects the completion of the bulk of our asset sales, the completion of our larger restructurings and the partial completion of the Orianna restructuring. On the reimbursement front, on July 31st, CMS issued its final SNF Medicare payment role for fiscal year 2019. The provisions of this final rule are effectively unchanged from the proposed rule issued on April 27.

The market basket increase and Medicare fee for service rates have set at 2.4% effective October 1, 2018. The value-based purchasing programs discounts to those rates are expected to average 0.6% net of rehospitalization rebates, also commencing October 1, 2018.

Most importantly, the new patient driven payment model or PDPM will replace the current RUG for methodology for Medicare fee per service rates effective October 1, 2019. PDPM is expected to budget-neutral for the SNF industry, eliminates therapy minutes as the principle driver of rates in favor of patient clinical characteristics and create opportunities for service efficiencies via group and current therapy protocols without sacrificing outcomes.

We are optimistic that PDPM will positively impact both facility performance and patient care with its focus on the need for patients rather than the volume of services provided. As to Medicaid rates, federal matching subsidies continue to sustain reimbursement increases near inflation levels as threats are block raining our per capita federal Medicaid funding have failed to materialize in Congress, subject to the outcome of the upcoming mid-term elections and their impact on the balance of power in Congress.

I'll now turn the call over to Bob.

Robert Stephenson

Thank you, Taylor, and good morning. Our reportable FFO on a dilutive basis was $155 million or $0.75 per share for the quarter as compared to $151 million or $0.73 per share for the second quarter of 2017. Our adjusted FFO was $159 million or $0.76 per share for the quarter and excludes the impact of $564,000 in provisions for uncollectable accounts, $1 million related to unrealized gains on our Genesis common stock warrants and $4.1 million of non-cash stock-based compensation expense.

Operating revenue for the quarter was approximately $220 million versus $236 million for the second quarter of 2017. The decrease was primarily the result of approximately $16 million of reduced revenue as we placed Orianna on a cash basis effective July 1, 2017, and accordingly did not record any lease revenue in the second quarter of 2018, and reduced revenue as a result of asset sales that occurred since the second quarter of 2017. The decrease in revenue resulting from the asset sales was offset by incremental revenue from a combination of new investments completed, capital improvements made to our facilities, asset transitions and lease amendments made during that same time period.

The $220 million of revenue for the quarter includes $18 million from non-cash revenue, $15.7 million of Signature rent and interest of which $13 million was contractual cash received. We did not and will not be recording the Signature deferred revenue until it's received. $7.8 million of Daybreak's full contractual revenue, which includes no straight line revenue, $300,000 of preferred care revenue, $3.6 million related to asset sold during the second quarter, and no revenue related to the Orianna leased facilities.

For revenue modeling purposes, we project our non-cash quarterly revenue will continue at $18 million to $19 million. We expect to record revenue from Signature and Daybreak as our full contractual amounts consistent with the second quarter. We expect to transition the preferred care portfolio and generate annual revenue between $5 million to $6 million starting in late-2018 or early-2019.

We expect that Orianna facilities to generate annual rent or rent equivalents of $32 million to $38 million when restructuring is complete. $3 million per quarter of that restructuring will be recorded in the third quarter of 2018 related to the Orianna, Mississippi portfolio that transitioned earlier this quarter.

Our G&A expense was $11.1 million for the quarter was just $3.3 million greater than our second quarter of 2017 G&A expense and $700,000 greater than our first quarter 2018, when eliminating the $2 million purchase option buyout that occurred in the first quarter of 2018. These increases were primarily due to legal expenses related through operator workout and restructuring.

For modeling purposes, we project our G&A run rate for the remainder of 2018 and be consistent or slightly greater than our second quarter G&A, as a result of legal expenses related to operator workout and transitions, and then returning to our traditional $8 million to $9 million of quarterly run rate.

In addition, we expect 2018 non-cash stock-based compensation expense to be approximately $4 million per quarter consistent with both the first and second quarters of 2018. Interest expense for the quarter, when excluding non-cash deferred financing costs was $48 million or the same as the second quarter of 2017, as lower debt balances were offset by a higher blended cost per debt, primarily as a result of higher LIBOR rates.

In the second quarter, we sold 47 assets for consideration of $138 million in net cash proceeds, a $25 million seller note and $53 million in buyer assumed HUD debt, recognizing a loss of approximate $3 million. As I mentioned earlier, in the second quarter, we recorded approximately $3.6 million in revenue related to those 47 dispositions.

During the quarter, we received $5.2 million in insurance proceeds related to a facility destroyed by a fire in 2017, and recorded a recovery of an asset previously impaired. We expect to receive additional insurance proceeds in the second half of 2018. The recovery offset impairment charges of approximately $4.1 million, primarily related to reducing a net book value on five facilities due to our estimated fair values or expected selling prices for a net recovery on real estate property of $1.1 million.

Turning to the balance sheet. At June 30, we had three facilities valued at approximately $4 million classified as assets held for sale and we are still evaluating approximately $90 million in potential asset disposition opportunity, which could occur over the next several quarters.

Our balance sheet remained strong for the three months ended June 30th. Our net debt to annualize EBITDA was 5.49 times and on our fixed charge coverage ratio was four times. It’s important to note EBITDA on these calculations has no annual revenue related to Orianna or construction in process related to new builds. When adjusting for the likely range of expected rental outcome from Orianna, the known revenue on the new builds and removing revenue related to our second quarter asset sales, our pro forma leverage would be roughly five times.

I will now turn the call over to Dan Booth.

Daniel Booth

Thanks, Bob, and good morning, everyone. As of June 30, 2018, Omega had an operating asset portfolio of 923 facilities with approximately 93,000 operating beds. These facilities were spread across 67 third-party operators and located within 40 states in the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio was slightly down during the first quarter of 2018 at 1.69 and 1.33 times respectively versus 1.71 and 1.34 times respectively for the trailing 12-months period ending December 31, 2017.

Turning to portfolio matters. In addition to the Orianna situation, which Taylor spoke about earlier and as we have discussed on previous calls, one of our non-top 10 operators, Preferred Care filed for Chapter 11 Bankruptcy as a result of the $28 million Jury Award in the State of Kentucky. While it maybe has no exposure of Preferred Care in Kentucky, we currently leased 14 facilities to their subsidiaries in New Mexico, Arizona and Oklahoma all of which are in the process of being transitioned to new operators per Omega's agreement with Preferred Care. Two facilities in Texas, previously leased to Preferred Care, transitioned to an existing Omega operator effective June 1st of this year. Omega expects the remaining 14 facilities to be re-leased during the fourth quarter of 2018.

In previous calls, we have discussed our restructuring agreements with both Signature and Daybreak. As an update, Omega is pleased to report that both our operators are fully compliant with their respective restructuring agreements, and operational performance is in line with or exceeding budgeted levels. At this time, we have no other material restructuring agreements in process.

Turning to new investments. During the second quarter of 2018, Omega completed three separate transactions totaling $77 million plus an additional $54 million in capital expenditures. The transactions included the purchase lease of five skilled nursing facilities in Texas for $23 million, $44 million mortgage loan for five skilled nursing facilities in Michigan and a $10 million mezzanine loan. All of the transactions are with existing Omega operators. These transactions bring our year-to-date investment total through June 30, to approximately $200 million, including capital expenditures.

Turning to Omega's repositioning activities. During the second quarter of 2018, Omega sold 47 facilities for approximately $216 million with an additional five facilities sold so far in the third quarter of 2018. This brings the year-to-date dispositions to 69 facilities inclusive of three mortgage loan payoffs for total proceeds of approximately $335 million. In addition to facility sales, Omega has re-leased 43 facilities year-to-date, which included the 12 Mississippi facilities mentioned earlier by Taylor. We are currently evaluating approximately 15 additional facilities to sell and 28 facilities to re-lease in the coming quarters. Omega continues to review our portfolio and discuss strategic repositioning opportunities with each of our operators.

I will now turn the call over to Steven.

Steven Insoft

Thanks, Dan. And thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue to work on our plans ALF Memory Care High Rise at Second Avenue at 93rd Street in Manhattan. The project is expected to cost approximately $285 million, including accrued rent, and is scheduled to open in the second half of 2019. The current estimate constitute of $35 million of cost increase. The increase in project cost is materially driven by the decision to purchase available REITs from the New York City MTA, resulting in a larger building combined with incremental accrued rent, resulting from our partial option buyout on January 3, 2018, and as discussed on last quarter's call.

Prior to the partial option buyout our tenant in Maplewood was paying rent currently on the land value of the project. Our conviction around expanding the project in our investment was supported by other market comps strengthening since our original underwriting. The increase in project size will not have an impact on the timing of the opening, and furthermore our anticipated yield will remain the same as our lease payments rise proportionally with costs.

Including the land and CIP of our New York City project, at the end of the second quarter, Omega Senior Housing portfolio totaled $1.5 billion of investments in our balance sheet, incurred by our growing relationship with Maplewood Senior Living and their best-in-class properties, as well as healthcare homes and Gold Care in the UK. Our overall senior housing investment now comprises 120 assisted living, independent living and memory care assets in the U.S. and UK. On a standalone basis, this portfolio not only covers its lease obligations at 1.21 times, but also represents one of the larger senior housing portfolios amongst the publicly listed healthcare REITs.

Our ability to successfully continue to grow these important components of our portfolio has highlighted by our 13 Maplewood facilities, and the related pipeline is predicated on coupling our tenants operating capabilities with our commitment to having in-house design and construction expertise. Through this same capability, we invested $54.1 million in the first quarter in new construction and strategic reinvestment. $38.7 million of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500 million inclusive of Manhattan. The remaining $15.4 million of this investment was related to our ongoing portfolio of CapEx reinvestment program.

I will now turn the call over to Taylor for some final comments.

Taylor Pickett

Thanks, Stephen. As we look back on the first half of 2018, we’re pleased with what we’ve been able to accomplish. We’ve completed the majority of our asset sales are compelling evaluations. We concluded our larger restructurings and we began receiving rents on our Orianna transition assets. While near-term labor cost pressures continue, we feel good about the future of the industry with improving demographics at the beginning of a multi decade cycle and a considered and thoughtful new reimbursement model next October. With an improved portfolio of assets and the majority of our disposition behind us, we can start focusing on redeployment proceeds and growing the business again.

And with that, I’ll open up to questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes

So you mentioned plans to focus on redeploying proceeds and returning to growing the business. And I recall in the past and maybe a few months ago, you said it was tough to find deals that meet your underwriting criteria. But one of the smaller players in the skilled space last week that they expect more deals with attractive pricing coming to market in the back half of the year. So my question is -- what are you seeing out there in the acquisition market of seller pricing expectations become more rational as the operating environment remains tough and a bit uncertain for some of those kind of less sophisticated operators with PDPM on the horizon?

Taylor Pickett

We’re not seeing the acquisition activity increased any real significance at this point. Mostly thing was driven sort of your smaller size transactions and most of them are with our existing operators and just haven’t been any large trades come to market. I don’t really anticipate seeing any of those in the latter half of 2018 at least where we sit today. 2019 can be a whole new ballgame, but at this point, it’s a fairly quiet investment environment.

Jonathan Hughes

And then, I guess kind of sticking with investments. How do you look at replacement costs versus stabilized acquisitions? I'm looking at the development pipeline excluding Maplewood in New York, which you just talked about, but the costs on SNF developments are around say $80,000 per bed, recent acquisitions are about $84,000. The trade says that future development commitments will take a back seat to acquisitions as pricing similar there and no construction risk?

Taylor Pickett

We're still looking about as much as possible. The fact of the matter is it's difficult, particularly with skilled nursing facilities to find deals that make sense from a development perspective. So we do as much of that as we can because of the tariffs spent can be very high in terms of coverage and credit improvement. So -- but, I think your view is correct. In terms of growth it's going to predominantly existing properties. As Dan said, today, it's not particularly active, but I concur with our peer that talked about last week the possibility of seeing more products come out as PDPM becomes a reality.

Jonathan Hughes

And then just one more, and I'll jump off. But could you give us an update on the Signature portfolio in terms of how operations are progressing there? I realized that restructurings only a few months behind us, and Dan mentioned in line. But can you just talk about the CapEx more for that portfolio? Does that ready to begin operationally? How things going now that they don't have to devote all their time and effort to fixing the cash structure? Thanks.

Taylor Pickett

Yeah. I mean now that the restructuring is behind, I mean there is a big sort of monthly up there back that are being able to focus on operations as I indicated, are performing according to planned or slightly above. So I think things look good. I mean the CapEx that we're deploying is more maintenance CapEx and that there have been new projects. So that's kind of an ongoing outlaying. But overall, things are going well at Signature.

Jonathan Hughes

Any update in terms of like admissions or maybe employee retention. Anything more specific you can give us?

Taylor Pickett

Through the process, they really didn't have any major bliffs in admissions or census or payer mix. Everybody battling waver costs, and they continue to battle it, it's an ongoing fight. I think if you were to talk generally with our operators, I'd say that it's still a challenge, but it's less of a challenge than it was a lot of these folks have been on the sort of front-end of the labor issues and have tried to retain folks on the front-end by providing higher wages and better benefits. So I don't think while it's still probably the biggest challenge in the sector, at least from our operators' perspective, it's not getting worse.

Operator

Our next question comes from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria

Thanks for the time. Just hoping we could talk about the non-core, non-stabilized bucket that you breakout in your rent coverage disclosure in the sup. And how and when is that could have reduced in size? You've completed a lot of sales you said and some of the restructurings are nearing an end. If you could just breakdown what's in that other bucket and when that should come down?

Taylor Pickett

Yes, so we have 15% in that bucket. It’s come down from 17%. And there are three components in there; the biggest is Orianna, which is 6% of that bucket. So as Orianna transition facilities move, and we finish out that restructure, and you’ll see that 6% go away overtime. And then we have 6%, that’s transitioned in sale assets. And Dan mentioned, we have a number of assets that we we’re looking to transitioning and we have additional sale assets and those will move again overtime, probably talking about six months for the bulk of that. And then the balance is 3% or the non-stabilized assets are -- didn't fill up. And the best example of that is a Maplewood new build that takes time to fill our skilled nursing facility that’s open, that’s filling. So that bucket can take up through a year just because it takes a long time to fill some of those levels. But I think the bulk of it one you’re going to see Orianna move and then the sales and transitions will move and that’s all relatively near-term.

Juan Sanabria

And then just on an incremental $90 million that you’re now looking to maybe sell at some point. What drove that decision? Was it anything operator specific or coverage levels coming down and kind of losing faith in those assets or just markets you don’t want to be in? Any color on what drove that incremental disposition guidance would be great.

Taylor Pickett

Actually you mentioned the question before, it really is a combination of all those. It’s either operator-driven, market-driven or physical plant-driven and or a combination of all the above or some of the above. And then different in each situation there unique for each operator and market.

Juan Sanabria

And just to be clear that extra 90 is now included in that 15% bucket?

Taylor Pickett

That’s part of that bucket. Correct.

Juan Sanabria

And then just a last question for me, you mentioned that you do expect more acquisition opportunities in the second half of this year related to PDPM like your peer said. Is that just because -- why is that our people worried about requirements in PDPM and just a transition or uncertainty of it? Or if you could just elaborate on how those two tied together?

Taylor Pickett

Just to clarify, I don’t think we see our view as the back half of '18. We’re not going to see a lot of new activity. But we think going into ’19, we’ll start to see the cycle, which has been kind of slow and skill pickup, forget about PDPM. But I think in time, we’ve seen historically anytime there are changes in reimbursements. There are a group of operators that look at that each iteration of more sophistication of this business has driven the consolidation spend the model that we’ve run forever. So it’s just another iteration of what has caused the consolidation of this industry over the last decade. So I think if history is [indiscernible] we'll see some of these local operators to say, okay, I’ve had enough, I’m not going to go through this next change. It’s just another step of consolidation that we’ve seen for very long time.

Operator

Our next question comes from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore

So last quarter, you gave us an update on Daybreak, they’re paying 75% of rents. Now, I think you said that there are back to full rent. Was there any background color a bit and what's the balance of accounts receivable now?

Taylor Pickett

Hey Chad, I think you referred to Signature. The Signature was paying 75% last quarter.

Chad Vanacore

Okay. And then …

Taylor Pickett

And it's basically what I said in -- go ahead Chad, I'm sorry.

Chad Vanacore

Was the Daybreak up-to-date as of last quarter?

Taylor Pickett

The Daybreak is up-to-date this quarter.

Chad Vanacore

Okay.

Taylor Pickett

The Daybreak works high by a couple of million dollars, and -- because we had to apply cash that was paid to for what they are. This quarter they're paying the full contractual. And as I said in my prepared remarks that looking best what we're recording going forward.

Chad Vanacore

Okay. So does that mean that they've already caught up so there is no outstanding AR associated with the rents earlier this year?

Taylor Pickett

They had [indiscernible] they've paid what was recorded last year that I caught in detail. Remember, we were recording they were like cash basis of piece of it. So that's being caught up overtime.

Chad Vanacore

Alright. And so you expect anything to get back to full current and repaid by sometime this year?

Taylor Pickett

Yes, just to be clear. So they're paying a 100% of contractual cash amount this quarter, actually paid that amount last quarter and caught up AR that we have recorded. So the one thing -- what we're getting at, Chad, I understand in this, they have back rent, it's not recorder our books and fully reserved that they'll begin to pay and we think it will be the back half of this year. But in the meantime, we're going to receive a 100% of the contractual amount on cash basis. And then as they continue to improve their operations, we'll start to pay down that previously unpaid rent, but we fully reserved it. So when they do that, we're going to recognize incremental income.

Chad Vanacore

Alright. Thanks for clearing up Taylor. And then just that the same store force changed a bit, and Juan asked about coverage, but I'm curious about occupancy how that's trended across the portfolio outside of your adjusted stabilized portfolio?

Daniel Booth

So occupancy has been pretty consistently stable over the last -- if you go back in our supplemental, last five quarters, but you can go back further than that. And it's stay pretty stable. Some mix jumps around a little bit, but seasonality, and you can see that it went up in the first quarter, but it was up at that same level, the previous first quarter of '17. So I can say that both the occupancy and mix would be overall very stable in our portfolio. There is not much movement.

Chad Vanacore

Alright, thanks Dan. That's it for me. Thanks.

Daniel Booth

Thank you.

Operator

Our next question comes from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein

I guess my question is kind of more theoretical. When you look at major changes in reimbursement, when do operators start preparing or changing their patient mix to prepare for the change in reimbursement like when you went from RUG-III to RUG-IV? Did they start change in their patient mix a quarter or two earlier or right when the rates did? I'm just trying to think about when we should start to see maybe operators change the way they operate and prepare for PDPM?

Taylor Pickett

Having talk to a number of our bigger operators, I don't think you'll see much of the change in terms of patients that are admitted into skilled nursing facilities. You may see new patients admitted with more serious clinical conditions. But I think the current patients that are being admitted will continue. There has been general sense from all of our operators and it goes to something that we all know, we’ve seen occupancies declined in the business. And so, frankly most of our operators are looking for any patient they can get. They may extend offerings. And just add one other note, Dan, it’s interesting, we’ve done analysis around the existing patient base and a conversion from the existing RUG-IV payment model to PDPM. And we agree with CMS that based on the rules, the regulations at the revenue impact will be neutral.

Daniel Bernstein

How are your operators and you guys thinking about what the margin impact might be, as you move from maybe more rehab to more complex care and different concurrent group therapy? We’re very, very long time, 10-year lows in operating margin in the space. I mean this PDPM going to help operating margins come back up even if this revenue neutral or is it just too early to tell?

Taylor Pickett

Well, I think, operating margins are likely to improve just because of the ability to do 25% group and concurrent therapy. So we’ll see therapy costs drop and revenue to remain relatively neutral. We think most people will benefit ultimately.

Daniel Bernstein

And then just turning to the acquisitions and the pipeline, I know you said that if there’s not a lot coming on in the second half of the year and who knows for next ‘19 yet. But, in general are you looking to add new operators or do you think the opportunities might be to grow with your existing operators? Are your existing operators starting to bring you any opportunities that you might want to expand with them? Again, thinking like this haves and have-nots, just like you said earlier in your comments, there is clearly need some consolidation in the space going forward. And do you want to find new operators or do you want to grow with the existing peers?

Taylor Pickett

We continue to look for new relationships with sophisticated folks. And I think we’ll continue to find them at the rate of 2, 3 a year. And I think we will do a lot of -- we will have a lot of activity with our existing group of operators, not just the top 10, but all the way down to the top 30.

Daniel Bernstein

But they haven’t started really bringing you a robust amounted to do at this point?

Daniel Booth

Because I think they are the largest source of the deals that we actually do that end up -- that we end up booking. So they've most of the deals that we’ve done in 2018 back into '17, those are all that come from our existing operators. Now there have been no large transactions that have been smaller, right? So they won’t move the needles much, but the line share of those transactions have all come from our existing operators.

Operator

Our next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.

Lukas Hartwich

Looking at Page 6 of the supplemental, it looks like your distribution of coverage improved a bit. Is there any color you can provide on that?

Taylor Pickett

It's a lot of operators that are just on one side of that coverage range or the other. In this particular quarter, we just had some folks that were just below the one two bump up into the one two in also with the below one bumped up into the over one. I'm discovered that that there was no -- it's not a dramatic movement, but a lot of operators, but it's a little bit more settled. It's just crossing over from one bucket to another. And in this particular quarter they went the right way.

Lukas Hartwich

Okay. So you think that it's just kind of quarterly noise that you think that trend kind of points to that improvement and kind of continuing?

Taylor Pickett

Overall, our coverage has been pretty flat for a quite a few quarters. And I think at least on the short run, we expected to stay pretty flat.

Lukas Hartwich

Very helpful. Thank you.

Daniel Booth

Thank you.

Operator

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender

Thanks. Just looking at the loan book, you've got a $23 million loan coming due this year. How is that looking as far as being paid back and any timing you could add?

Daniel Booth

We might have discussed stump on this, but I'm not sure which $23 million loan average inside of all this.

Todd Stender

If I read it right yes.

Daniel Booth

Yes, it helps. We're actually in the middle of discussions to convert that mortgage into a simple ownership. So we don't expect those dollars to come back at all.

Todd Stender

Okay. Whose that with -- have you disclosed to the tenants whose are borrower?

Taylor Pickett

We hadn't disclosed the tenant, but its top buy tenant.

Todd Stender

Okay. And then anymore details the $44 million mortgage you've made and then also with the mez loan you've added to that. Any details, terms, tenants anything like that?

Taylor Pickett

The $44 million mortgage or mortgages that we put on were on Detroit and Michigan, were at beneficial to have interest expense and the flows of rent expense. It looks of smell of just like the REITs in terms of its term and its rate which was 9.5%. And then the 10% of the mez loan was just additive to existing mez loan that we had, and it was 12%, and the term, I believe was extended out several years.

Todd Stender

Okay, thanks. And then how about the tenant sort of five SNFs in Texas, you have added the dynamics there, and I know the coverage that was underwritten at?

Taylor Pickett

Those underwritten at our normal underwriting, so it's somewhere in the 13 to 14 range. And once again, it yielded at 9.5% rate.

Todd Stender

And who with that leased to?

Taylor Pickett

One of our existing operators -- one of our top 10.

Todd Stender

Alright, thank you.

Operator

Our next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Tayo Okusanya

Couple from me. First of all, just giving your comments on the acquisition outlook, is it reasonable to expect that maybe you're focusing more on the debt book near term building that business? And so you're still getting pretty good return earning higher in the capital structure?

Daniel Booth

I don’t do this. From our perspective, Tayo, the debt deals we’ve done are all relationship-driven. So it’s really not building the debt book per se. And as Dan mentioned, we've won Michigan deal, it’s essentially a lease in terms of its form. So we’re going to continue to focus on the symbols of leases. And to the extent, we have debt deals that are relationship-driven and are somewhat opportunistic will do them.

Tayo Okusanya

And then could you also talk a little bit about just your tenant base and your watch list at this point, again, how to stabilize a stable coverage this quarter. But again, taking a look at your tenant list, again companies like Diversicare that are public entities that, again the stop seems to be struggling a little bit. Just kind of walk us through again some of these your top 10 tenants, public and private and kind of what you’re thinking at this point about the overall health?

Taylor Pickett

Overall, our top 10 at track are our overall portfolio. And they’ve been pretty stable for the last five, six, seven quarters. Diversicare, is a public Company. We’ve had some of those assets in our portfolio for 20 plus years. It’s arguably one of the more stable group of assets in our portfolio and have been for a very, very long time. Its coverage is right around our mean. And so -- we believe that our portfolio has been very stable and it has continued to be very stable over a long period of time. And then as far as other top 10, I mean we’ve addressed some issues that we have with those guys, obviously, in the Signature, Daybreak or Guardian. And so we think we're other side of those restructures and we hope to see some improvement in the coming quarters.

Tayo Okusanya

Last one from me, just around the dividend. Again, first half of the year, I think when people take a look at cash flow from operations, it is below your current dividend coverage ratio. I think again this year you’re doing a lot of sales, so you do have a lot of possible gains that are impacting the taxable income that may not be there next year. So just kind of curious how you’re thinking about their dividend on a going forward basis kind of given taxable income maybe somewhat inflated this year because of gains and they’re still not coverage from a cash flow from operations perspective?

Taylor Pickett

We’ve actually done a lot of work around taxable income and there is no issue there in terms of payout of gains, but its offset by appreciation and other costs. So we’re comfortable there. And we have no issues and waits to distributions and taxable income. And then as we think about the dividend on a go forward basis and the reason I spend a little to talk about pro forma for Orianna, most of those assets back to work, let alone other assets that we have in the construction pipeline, 2nd Avenue of the SNFs. We think we’re going to be in a very comfortable spot in terms of payout ratios in the next six to nine months. So I would expect that the dividend would be -- it will remain at $0.66 a share, and you’ll see the coverage ratio improve pretty significantly with the hope that we get back to our whole month of being able to grow the balance sheet and grow the revenue streams and have a recurring increase in dividend. The model worked well for 5.5 years.

Tayo Okusanya

Great. Thank you very much.

Taylor Pickett

Thank you.

Operator

Our next question is a follow-up question from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes

Hey thanks for the follow up. I misspoke on the cost to bill SNFs earlier. It looks like it's about $160,000 per bed to build in. And you're buying about half of that. I assume you answer is the same. So I mean acquisitions looks more attractive than building right?

Taylor Pickett

I think there was just going to be more opportunity from the acquisition perspective. If we add more opportunity to build, we would, I just stop -- even if we have the desire to put 20 shovels in the ground, there would be, we wouldn't be able to find out any opportunities. So I think from our perspective, you're right. We're going to be focused more on acquisitions in terms of capital allocations just because of opportunities. And you're also right on the per -- the cost per bed. Now, a lot of those assets were being built in very desirable densely populated markets, where the resulting cash flow with solid levels are quite strong.

Jonathan Hughes

Okay. And then just one more. What was the IRR on the $300 million of dispositions completed this year and sorry if this has been mentioned before. But were those legacy Omega assets [indiscernible] assets and mix of both? Thanks.

Taylor Pickett

Yes, look, in my prepared comments, I talked about the underlying cash flows [indiscernible] level was $25 million on $311 million in sales. So 8% yield type assets. It's pretty attractive pricing. And the second half -- what was the second half of this question?

Unidentified Company Representative

It was on mix of Omega and legacy of it.

Jonathan Hughes

Okay. Fair enough. Thanks.

Taylor Pickett

Thank you.

Operator

Our next question is another follow-up from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria

Just wanted to follow-up on Tayo's question. You've talked about kind of feeling comfortable with the coverage. But are there any other issues whether it's cash flow generation or litigation to where there could be another watch list tenant or rent restructuring discussion going on that because of the underlying coverage good bye, but because of litigation or other cash flow issues?

Taylor Pickett

Well, I mean litigation toward comes out of the blue right, but from sort of a corporate overhang issue or other liquidity issues, we don't see any on the right of any size at this point.

Juan Sanabria

Okay. Thank you.

Operator

[Operator Instructions] At this time, I'm seeing no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Taylor Pickett

Thanks Brendan. And thank you everyone for joining our call today. Bob Stephenson and Matt Gourmand will be available for any questions you may have.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.